American Viscose Corporation v. Rothensies

• Decision Date: 22 July 1940
• Docket Number: No. 148.,148.
• Citation: 34 F. Supp. 217
• Parties: AMERICAN VISCOSE CORPORATION v. ROTHENSIES, Collector of Internal Revenue.
• Court: U.S. District Court — Western District of Pennsylvania

34 F. Supp. 217

AMERICAN VISCOSE CORPORATION v. ROTHENSIES, Collector of Internal Revenue.

No. 148.

District Court, E. D. Pennsylvania.

July 22, 1940.

Drinker, Biddle & Reath and Charles J. Biddle, all of Philadelphia, for plaintiff.

Thomas J. Curtin, Asst. U.S. Atty., and Edward A. Kallick, U.S. Atty., both of Philadelphia, Pa., and Paul S. McMahon, Sp. Asst. Atty. Gen., for defendant.

KIRKPATRICK, District Judge.

This is a suit to recover capital stock taxes paid for the year ending June 30, 1935, under the provisions of Sec. 701 of Title V of the Revenue Act of 1934, 26 U.S. C.A. Int. Rev. Acts, page 787. The amount which the plaintiff seeks to recover is $131,923.00 — a sum made up of three items of capital stock tax paid for the year 1935 by the plaintiff and by two other affiliated corporations, whose assets, including their claims for returns, were acquired by the plaintiff prior to bringing this suit. The basis of the plaintiff's cause of action is that the section of the statute under which the tax was assessed and collected is unconstitutional, being in contravention of the Fifth Amendment.

The defendant has filed a motion to dismiss, and in his argument makes two points, first, that the complaint does not show that the plaintiff has sustained any direct injury as the result of the enforcement of the statute, and hence, under the rule of Massachusetts v. Mellon, 262 U.S. 447, 43 S.Ct. 597, 67 L.Ed. 1078, is not in a position to challenge the constitutionality of the act, and, second, that the act is constitutional. The second question only will be considered.

Whether or not the capital stock tax of Sec. 701 and the excess profits tax of Sec. 702, 26 U.S.C.A. Int. Rev. Acts, page 789, were intended as a self-adjusting (and inferentially, unitary) levy, which was the view taken by the Court of Claims in Allied Agents, Inc., v. United States, 26 F. Supp. 98, it must be conceded that they are at least closely related "adjuncts," one of the other. It is the fact that the amount of neither can be ascertained until a valuation of the taxpayer's capital has been made which is the same for both taxes and for fixing which only one method is prescribed. This method of fixing the value of the capital is the point at which the constitutionality of the capital stock tax is attacked, and, in examining that question, one cannot be wholly oblivious of the provisions of Sec. 702.

The scheme of taxation set up by the two sections (see note 1) is that the taxpayer must make its own valuation of its capital stock, which declared valuation is accepted, without challenge or revision, as the basis by which the amounts of both taxes are arrived at — the capital stock tax of Sec. 701 at the rate of one-tenth of one per cent. of the declared value, and the excess profits tax at the rate of 5 per cent. of such portion of its income as is in excess of 12½ per cent. of the declared value.

For the taxable year June 30, 1934 to June 30, 1935, the declaration of value had to be made, and was made by this taxpayer, before July 31, 1935. The law, Sec. 701 (f) (as applicable to this particular plaintiff) required the value to be declared as of December 31, 1933, subject to certain adjustments for subsequent additions to or subtractions from capital. It will not be necessary to go into the adjustment features of the act and their modifications by later statutes, but, in general, it may be said that the taxpayer was and still is to a considerable extent bound for future years (now two) by his original declaration.

The challenge to the constitutionality of the act as it applies to the capital stock tax is chiefly based upon the argument that, although on its face it is an ad valorem tax, it is actually imposed, not on actual value, but on an arbitrary valuation which the taxpayer may fix at any figure which it chooses regardless of the fact.

It is true that the tax may be based upon a wholly arbitrary valuation, but it is also true that it need not be. There is nothing in the act which stands in the way of the taxpayer, which has more accurate knowledge of its own business than anyone else, declaring what it finds or believes to be the actual value of its own capital. Indeed, the internal evidence from the statute itself and the past legislative history of the taxes imposed indicate that it was the intention of Congress that it should do so. Hence, the argument of the plaintiff that the scheme of taxation forces the taxpayer against its will to play a guessing-game against the government, as though it were compelled to draw numbers from a hat and be taxed upon the figure which it draws, is not wholly applicable. Logically, the real complaint (not altogether captious) against the act is that, under it, a taxpayer, being given an opportunity to guess at the amount of its future income in order to save itself tax, may, and frequently does, make a wrong guess, and so may be compelled to pay more tax than it would had it either (a) correctly forecast its earnings, or (b) not tried to guess at all but confined itself to actualities and made a true and accurate return of the real value of its capital. But even so, the plaintiff argues, it is under compulsion, because the economic consequences to it by way of large excess profits tax may be disastrous, and because competition with others which are doing the same thing leaves it no choice but to ignore actual values and base its declared valuation on a guess as to its future profits, just as, in conducting its business, it must be continually guessing at future variables, such as the cost of raw materials. This, it says, is taking its property without process of law.

Undoubtedly there will be years where the taxpayer will pay a heavy excess profits tax, which might be saved had it foreseen its unexpected prosperity and inflated its...